SEBI Bars CARE Ratings Ex-CEO Mokashi for Ratings Manipulation

SEBI Bars CARE Ratings Ex-CEO Mokashi for Ratings Manipulation

The Securities Exchange Board of India (SEBI) has barred the former MD and CEO of CARE Ratings Rajesh Mokashi from associating with any-SEBI registered organisation, either in a direct or an indirect capacity, for a period of two years in a case pertaining to interference in the rating process of the rating firm in instruments issued by Dewan Housing Finance Ltd. (DHFL).

CARE is a Sebi-registered and RBI-accredited credit rating agency, while DHFL ((now known as Piramal Capital and Housing Finance Ltd) is a Non-Banking Financial Company (NBFC).

In September 2018, IL&FS, which was rated highly by CRAs, collapsed after failing to meet its debt payment obligations, sparking a liquidity crisis in the financial services market.

Almost all rating agencies had given high ratings to IL&FS when the ground reality of the company was different. The rating agencies have been accused of not reporting the deteriorating financials of IL&FS. This prompted SEBI in December 2018 to initiate adjudication against credit rating agencies.

Since December 2018 onwards, the market regulator received eight whistle-blower complaints alleging that CARE Ratings was granting AAA ratings to higher fee-paying clients.

In the show cause notice, Mokashi was accused of interfering in the rating committee decision while it rated instruments issued by YES Bank, Reliance Communications, Dewan Housing and Finance (acquired by Piramal Capital), and Housing Finance and Infrastructure and Financial Services, a unit of Infrastructure Leasing & Financial Services (IL&FS).

The main issue that arose for consideration in the present matter was whether Noticee no. 1- S. B. Mainak (former Non-Executive Chairman of CARE) and Noticee No. 2- Rajesh Mokashi (collectively referred as Noticees) had interfered in the rating process followed at CARE.

SEBI on investigation found WhatsApp chats between key employees that showed the conflict between business development and rating functions at CARE. In the matter of DHFL the rating team and rating committees were not allowed to act independently and were instead guided by the undeniable pressure exerted by Mokashi.

SEBI found various phone records to substantiate how dealings to manipulate the ratings were done. The regulator said that Mokashi was only “paying performative obeisance” to the regulatory mandate by not being part of the rating committees but was still interfering in rating decisions. The law does not permit the management of a rating firm to be part of the rating committee.

SEBI opined, Noticee 1, who was the Non-Executive Chairman of CARE, was not supposed to have any role in the individual rating actions taken by the CRA. Similarly, in the case of Noticee 2, who was the CEO and MD and responsible for the business development functions, was in terms of the regulations, not permitted to interfere with the rating decisions.

SEBI on probe found the existence of a skewed hierarchical relationship allowing Mokashi to exert influence on the employees of CARE for ensuring favourable ratings towards certain Issuers. SEBI was of the view that it cannot be possible that without any reason the members of RC had repeatedly exchanged WhatsApp messages lamenting the repeated interferences by Mokashi during the duration of the DHFL ratings for the period from September 2018–February 2019.

SEBI whole-time member Ashwani Bhatia pertinently noted that from the information relating to fees charged during the financial year (FY)18–19, as stated in the forensic audit report (FAR), the highest fees received were from DHFL– Rs. 7.1 crore. Juxtapose this amount (Rs. 7.1 crore) to the exposure of DHFL of over Rs. 90,000 crore to its creditors.

The Board emphasized the its importance for a credit rating agency (CRA) to give out a fair picture of the creditworthiness of a client. The fee earned by CARE for the relationship was a minuscule 0.0079 per cent of the total credit exposure of DHFL.

Moreover, SEBI called into question the ratings assigned to RCom and IL&FS which had been put on notice. It found the rating agency then headed by Mokashi had failed to take any remedial steps to address the concerns that were raised.

In this regard SEBI noted, Mokashi was still ‘directing’ the rating committee (RC) members to rely on projections given by Issuers and not take rating action – the very practise which was mainly called into question in the proceedings initiated in the matter of Reliance Communications and IL&FS.

Therefore, SEBI observed, “In the face of such interference by Mokashi, the measures adopted by CARE to ensure the independence of the rating decisions like independent RCs, separation of rating and business development, amounted to nothing more than a collective exercise in futility. In other words, the insulation did not afford sufficient protection to the members of the RC while rating DHFL. Mokashi, I note, was only paying performative obeisance to this regulatory mandate by not being a part of rating committees, but, as noted above, was still interfering in rating decisions.”